By Hal M. Bundrick, CFP
Money is tight, and you’re looking for expenses to cut. Your mortgage payment is the biggest bite out of your paycheck, so that seems like the logical place to start.
Here are some ways that may help you lower your monthly mortgage payment and important considerations about each one.
Refinance to a longer term
Refinancing a mortgage to gain more time to repay is a popular option. If homeowners have made payments on a 30-year loan for a few years, for example, they refinance the remainder back out to 30 years.
But extending a loan term means you’re piling on additional interest charges, especially if you’ve been paying for a significant amount of time. So, this move should be a “last resort” option, says Randall Lowell of Parkview Services, a HUD-approved nonprofit housing counselor service in Shoreline, Washington. HUD is short for the Department of Housing and Urban Development.
If you’re in that situation, he suggests looking first for a streamline refinance loan product. Some government-backed loans — such as Federal Housing Administration and Department of Veterans Affairs mortgages — offer these lower fee and less paperwork refis.
Apply for a loan modification
If you’ve experienced a severe financial hardship and your mortgage payment is no longer affordable, a loan modification may be an option. That’s when a lender restructures your loan in some way to lower the monthly payment.
You don’t have to be in default to request a loan modification from your lender, Lowell says. If you’re facing an imminent reduction in income — for example, from the loss of a job or retirement — he says it’s a good idea to get ahead of the issue.
“When you reach out to a lender, they might actually refer you over to a HUD-approved housing counselor to discuss your situation,” says Stephanie Somerville, with GreenPath Financial Wellness, a HUD-approved nonprofit financial counseling service in the Detroit area.
Eliminate mortgage insurance
Somerville can speak from her own experience getting mortgage insurance eliminated. After owning her home for only a year in a rapidly appreciating real estate market, she refinanced her FHA loan with lifetime mortgage insurance into a conventional loan without mortgage insurance.
Her mortgage rate dropped one percentage point, and she was free from the FHA mortgage insurance.
Your credit score and the home’s rise in value will play a big part in making this work. Generally, you would need to have more than 20% equity in your home to cancel mortgage insurance. That means a lender appraisal may have to show a substantial increase in your home’s market price, depending on how much you put down.
Refinance the loan to a lower rate
You probably have considered refinancing your loan to a lower rate. Replacing your mortgage with a new loan at a lower interest rate would reduce your monthly payment, right? Yeah, but it’s harder than it sounds.
Somerville says you’ll need equity in your property to pull this one off. Rising home values might work in your favor. And you’ll need a good credit score, too.
However, a small interest rate improvement probably won’t make enough difference, especially when you consider the costs of a refi, which include closing costs just like those you paid on your existing mortgage.
“If you can get a significantly lower rate, that might drive down your payment,” Somerville says.
The mortgage may not be the problem
Lowell says a vast majority of the people who come to housing counselors are struggling with budget issues, but the mortgage is usually not to blame.
More often than not, it’s credit card debt. And prioritizing ways to attack that debt may do more to improve their cash flow than reducing the monthly mortgage payment.
Somerville agrees it’s better to chip away at that debt without putting your house at risk.
“Credit card debt is unsecured; it’s not attached to anything,” she adds. If you don’t make a payment, nothing can be taken. But, if you don’t make your mortgage payments — on a refinance or on a home equity line of credit — you could lose your home.
Hal is a personal finance writer at NerdWallet. He is a certified financial planner and former financial advisor.